WEAKNESSES

Risk assessment

Faster growth buoyed by domestic demand

Growth is expected to continue in 2018, thanks to more vigorous domestic demand and more favourable economic conditions in the United States, despite the Jamaican government’s fiscal austerity policy. Households will benefit from the gradual fall in unemployment, tax cuts for the poorest households, and higher remittances from expatriate workers in the United States. Exports of bauxite and aluminium (44% of total exports) will sustain activity, buoyed by a moderate increase in metal prices. Strong performances in the agricultural sector, together with the depreciation of the local currency, will also help maintain the favourable trend of the country’s exports. Meanwhile, there will be greater momentum in the tourism sector, thanks to the expected increase in the number of tourists from the United States, which is the country’s main trading and tourism partner. Private investment will be concentrated mainly in this sector, as well as in transport infrastructure projects (roads, bridges), largely financed by Chinese investors. However, limited infrastructure expansion and low workforce productivity will still hamper private investment in other sectors. The central bank is expected, in accordance with the IMF’s recommendations, to intervene in a limited manner on the foreign exchange market in order to build up foreign exchange reserves (currently five months of imports), enabling it to withstand any pressures on the local currency, the Jamaican dollar. Meanwhile, inflation is likely to increase, due to robust domestic demand and the moderate rise in oil prices, though remaining within the central bank’s target range (4-6%). Nonetheless, the bank could tighten monetary policy if there is a significant increase in inflationary pressures.

Budgetary efforts rewarded, still under the watchful gaze of the IMF

The government, in place since February 2016, is pursuing its fiscal austerity policy, begun in 2013, in return for aid from the International Monetary Fund. As a result of the progress already made on stabilising the economy, the IMF approved a new stand-by arrangement in November 2016 for USD 1.64 million, valid for three years from 2017.

Apart from cutting operational spending, the consolidation covers the introduction of new indirect taxes (16.5% VAT, taxes on fuel, tobacco, and alcohol), in order to increase the weak fiscal revenues, linked to the large informal economy (40% of the population). While the government has generated a primary surplus of 7%, the debt interest burden means it is only just able to balance the budgetary accounts. Thanks to this policy, the government should be able to keep to its commitment to bring the public debt ratio to below 100% of GDP by 2019-20. Furthermore, half of this debt is denominated in foreign exchange, exposing it to exchange rate risk, especially as the Jamaican dollar is still steadily depreciating. The government’s ability to issue more bonds on the domestic market will allow it to limit this risk, while the public debt will gradually decline.

Stable current account deficit dependent on remittances from expatriate workers

The current account deficit is likely to remain stable in 2018. The trade balance will continue show a large deficit (17% of GDP) because of the moderate increase in the oil price (most imported item) and rising imports triggered by reinvigorated domestic demand. The depreciation of the local currency against the dollar is expected to continue and to boost export competitiveness. The trade deficit will, to a great extent, be offset by increased remittances from expatriate workers, who are mainly United States residents, as well as by excellent tourism performance.

The Prime minister remains popular despite austerity

After narrowly winning the general elections held on the 25th February 2016 (33 seats out of 63), the Jamaican Labour Party (JLP) and the Prime Minister, Andrew Holness, remain popular. One of the reasons for this popularity is the delivery of his key campaign promise to abolish income tax on the lowest-income households, without losing the IMF’s financial support. Nevertheless, austerity measures, high crime rates and the still significant unemployment rate are eroding this popular support. At the geopolitical level, the government is expected to prioritise relations with the United States, its main trading partner and source of remittances from expatriate workers. The government is also expected to concentrate its efforts on regional co-operation to fight against drug trafficking and high crime levels, which affect the business climate because of the resulting high costs to businesses.